The week's business brought together the huge stores of cash in investors' fixed income allocations with European governments' robust need to borrow to produce a crop of high grade bonds bigger, longer and tighter than their predecessors.
Strong market conditions in both dollars and euros generated hugely oversubscribed books, allowing Italy to double the size of its issue from $2bn to $4bn, Austria to increase its 15 year bond from Eu3bn to Eu4bn and Belgium to price its Eu5bn five year at 9bp over the Bobl 145, the tightest pricing the Kingdom has achieved against the benchmark German curve in the five year maturity.
But the order book for the Kingdom of Spain's Eu6bn 32 year issue surpassed them all. The longest dated euro zone government bond, Spain's transaction showed that last year's acceleration of issuance at the long end of the curve has continued strongly into this year. Investors placed Eu15bn of orders on Monday and the book totalled Eu17bn by the time it was closed on Tuesday morning.
The Republic of Italy has long wanted to bring a 10 year global bond. Its last deal of the kind was launched in February 2003 and since then market conditions and the borrower's needs have not coincided.
This week, however, buoyant demand for dollars allowed Italy to aim for its goal. The Treasury awarded the mandate for a $2bn 10 year issue to Merrill Lynch, Morgan Stanley and Nomura.
Domenico Nardelli, head of derivatives and international funding at the Italian Treasury in Rome, described it as one of the most swiftly and smoothly executed transactions he had ever seen.
?On our part it only took a degree of serious consideration with regard to realistic pricing,? he said. ?We had to depart quite significantly from our secondary market levels... The only tough decision to make was what the appropriate level would be for our issue.?
Vital to the success of the bond was referencing the pricing to US agencies, to galvanise US investors into participating.
?We had an important reference in the US agencies and using them and the Treasury as benchmarks, we realised we could issue at a significant arbitrage to our euro funding levels,? said Nardelli.
The republic had intended to raise at least $2bn and announced price guidance of Treasuries plus 38bp-39bp, close to where US agencies were trading.
However, in just 24 hours, the book had reached $6.5bn, allowing Italy to double the size of its bond to $4bn and price it inside guidance at 37bp over.
At this level the deal was 1.5bp through Fannie Mae and 2.5bp through Freddie Mac. Despite being priced through agencies, the issue sold heavily in North America, which accounted for 47% of distribution, including US offshore accounts.
Asia came in for 30%, with the balance split almost evenly between Europe, the UK and Ireland.
The book was of high quality, with government institutions buying 36% of the paper, investment managers 28%, banks 17%, and insurance companies and pension funds 10%.
Stuart McGregor, head of frequent borrower syndicate at Merrill Lynch in London, described it as a groundbreaking transaction.
?The 10 year sector of the dollar market has historically only had the GSEs [US government sponsored enterprises] providing liquid benchmarks,? he said. ?While there have been many interesting transactions in the past, this deal for Italy took issuance in this tenor to a new level. ?This was the republic's first appearance in the 10 year dollar sector since the beginning of 2003 and its success again cements Italy's reputation as a true international provider of liquidity in the dollar market.?
Some market participants attributed the success of the deal to its cheap pricing of Libor less 3bp, but Italy saved 7bp compared to its domestic funding costs and established a highly liquid benchmark, which bodes well for future issuance.
?We have Eu10bn equivalent to raise in foreign currencies this year and we will see if the market is supportive,? said Nardelli. ?However, based on the market response to our dollar bond and to our Swiss franc issue last week, the situation looks very encouraging. Our programme has got off to a very good start.?
Sweden's rare benchmark
At the other end of the pricing spectrum, the Kingdom of Sweden sold a punchy $1bn five year benchmark, re-offered at Libor less 30bp by Citigroup and JP Morgan. This was a very rare item ? Sweden's first $1bn bond since 2002 and its first $1bn five year for 10 years.
Maria Norstrom, assistant director responsible for domestic and foreign currency funding, said the Swedish National Debt Office had not expected to issue so early in the year but was offered terms it could not resist.
Sweden admits to being an opportunistic borrower to which all-in cost is everything, but the extreme scarcity of its paper, especially in benchmark size, allowed for the tightest pricing by any sovereign apart from the US and the UK.
The kingdom usually issues deals of $500m and increases them in taps to benchmark size. But the country needs to borrow three times as much this year as in 2004. ?Our funding requirement is roughly $4bn this year and we expect to raise $3bn of it in the capital markets,? said Nordstrom. She did not rule out issuing another benchmark later in the year.
Asian demand was the driver, with more than 50% placed in the region, mainly with central banks. But the issue also appealed to US offshore accounts, which bought 31%, and European investors, which took 11%.
Sweden's deals have a habit of performing well in the aftermarket as a result of retail buying and this issue is also expect to tighten significantly.
Newcomer Kommuninvest
Kommuninvest, the Swedish local government funding agency, also took advantage of strong demand to issue its inaugural dollar benchmark this week, a $1bn five year, lead managed by Credit Suisse First Boston, Dresdner Kleinwort Wasserstein and Nomura.
The borrower, rated Aaa by Moody's, has expanded its funding in recent years, in line with the number of companies it lends to and the number of municipalities that participate in its structure.
Its borrowing needs have risen from $2bn-$3bn in 2004 to $3bn-$4bn this year. A further increase to $4bn-$5bn is expected in the future, leading Kommuninvest to place more emphasis on benchmarks in its funding strategy. The issuer held an extensive roadshow in Europe and Asia to explain its credit and how Swedish local government works.
?This is very different from local governments elsewhere in Europe and definitely in Asia,? explained Kommuninvest's CFO Tomas Werngren. ?In Sweden, local governments have responsibility for 70% of public services and represent the majority of the Swedish public sector in terms of both taxes raised and services provided.?
The hard work paid dividends, with an order book of $1.5bn and distribution of over 60% with central banks. The borrower achieved a Libor level of minus 5bp.
